America's Great Depression

[Sara S]

from delancyplace.com:

In today's excerpt - in a recession, it is the widespread assumption of politicians,
citizens and economists that government intervention is required to return the economy
to prosperity. There is an different line of thought, however, that states that
recessions are an inevitable result of excesses (e.g., the overbuilding and related
overlending that brought about our current crisis), and that government intervention
simply prolongs the period required to "write-down" or otherwise absorb these excesses.
One such alternative theory is the Austrian school of economic thought, espoused
by such authors as Ludwig von Mises and his economic disciple Murray Rothbard.
Rothbard notes that the Great Depression began early in the term of President Herbert
Hoover, and that Hoover spent 3.5 years aggressively intervening in the economy
in a way never previously done, and as a direct result greatly exacerbated and prolonged
the Depression - before handing the worsened crisis over to Franklin Roosevelt in
1933. Roosevelt's famous New Deal programs were largely just an elaboration of Hoover's
. For example, Rothbard notes that in U.S. depressions prior to 1929, employers
simply reduced wages instead of instituting massive layoffs, and un- employment
remained relatively low as a result. Wages were raised with the recovery. He argues
that only with the widespread introduction of minimum wages were employers forced
to lay off employees in large numbers, which led to unprecedented unemployment rate
of 25% during the depths of the Great Depression:

"If government wishes to alleviate, rather than aggravate, a depression, its only
valid course is laissez-faire-to leave the economy alone. Only if there is no interference,
direct or threatened, with prices, wage rates, and business liquidation will the
necessary adjustment proceed with smooth dispatch. Any propping up of shaky positions
postpones liquidation and aggravates unsound conditions. Propping up wage rates
creates mass unemployment, and bolstering prices perpetuates and creates unsold
surpluses. Moreover, a drastic cut in the government budget - both in taxes and
expenditures - will of itself speed adjustment by changing social choice toward
more saving and investment relative to consumption. For government spending, whatever
the label attached to it, is solely consumption; any cut in the budget therefore
raises the investment-consumption ratio in the economy and allows more rapid validation
of originally wasteful and loss-yielding projects. Hence, the proper injunction
to government in a depression is cut the budget and leave the economy strictly alone.
Currently fashionable economic thought considers such a dictum hopelessly outdated;
instead, it has more substantial backing now in economic law than it did during
the nineteenth century.

"Laissez-faire was, roughly, the traditional policy in American depressions before
1929. The laissez-faire precedent was set in America's first great depression, 1819,
when the federal government's only act was to ease terms of payment for its own
land debtors. President Van Buren also set a staunch laissez-faire course, in the
Panic of 1837. Subsequent federal governments followed a similar path, the chief
sinners being state governments which periodically permitted insolvent banks to
continue in operation without paying their obligations. In the 1920-1921 depression,
government intervened to a greater extent, but wage rates were permitted to fall,
and government expenditures and taxes were reduced. And this depression was over
in one year -in what Dr. Benjamin M. Anderson has called 'our last natural recovery
to full employment.'

"Laissez-faire, then, was the policy dictated both by sound theory and by historical
precedent. But in 1929, the sound course was rudely brushed aside. Led by President
Hoover, the government embarked on what Anderson has accurately called the 'Hoover
New Deal.' For if we define 'New Deal' as an antidepression program marked by extensive
governmental economic planning and intervention - including bolstering of wage rates
and prices, expansion of credit, propping up of weak firms, and increased government
spending (e.g., subsidies to unemployment and public works) - Herbert Clark Hoover
must be considered the founder of the New Deal in America. Hoover, from the very
start of the depression, set his course unerringly toward the violation of all
the laissez-faire canons. As a consequence, he left office with the economy at the
depths of an unprecedented depression, with no recovery in sight after three and
a half years, and with unemployment at the terrible and unprecedented rate of 25
percent of the labor force.

"Hoover's role as founder of a revolutionary program of government planning to combat
depression has been unjustly neglected by historians. Franklin D. Roosevelt, in
large part, merely elaborated the policies laid down by his predecessor. To scoff
at Hoover's tragic failure to cure the depression as a typical example of laissez-faire
is drastically to misread the historical record. The Hoover rout must be set down
as a failure of government planning and not of the free market."

Author: Murray N. Rothbard

Title: America's Great Depression

Publisher: Ludwig Von Mises Institute
Date: 1963
Pages: 106-107
America's Great Depression
by Murray N. Rothbard by Ludwig Von Mises Institute
Hardcover